Dagong Global Credit Rating Co., Ltd.
July 24, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to downgrade both the local and foreign currency sovereign credit ratings of Mongolia to B from B+, taking a negative outlook. Due to the sustained downturn in international mineral prices and China's economic slowdown, Mongolia has shown increased economic, financial, and exchange rate risks. Its wealth creation capacity has been sharply reduced, and the vulnerability of debt repayment sources has increased substantially. Thus, the government solvency for both local- and foreign-currency debt has worsened markedly.
The key reasons for downgrading the sovereign credit ratings of Mongolia are as follows:
1. The slow progress of reform and rising banking risks have put pressure upon the country’s debt environment. The "Economic Recovery Program" will aid Mongolia's economy out of current difficulties. Nevertheless, given many uncertainties surrounding the external environment, reform will be carried out slowly. In the short term, the central bank will adopt a moderately tight monetary policy to control inflation and stabilize the exchange rate. Credit growth will slow down, and the role of banks to support the real economic development will be weakened. Risks amongst banks’ liquidity and exchange rate are prominent, asset quality has deteriorated, and financial risk has risen.
2. Mongolia’s wealth creation capacity has declined, and it appears difficult to overcome the country’s economic vulnerability in the medium term. As its fiscal consolidation policy curbs public investment in the short term, the decline in household income and a heavy household debt burden inhibit household consumption. Meanwhile, Mongolia’s economy is expected to go into recession in 2017, when the economic growth rate will be -0.2%. With the stabilization of mineral prices and growth in mining investment, economic growth is expected to rise to 1.8% in 2018. In the medium term, Mongolia’s economy has a high growth potential thanks to resource endowments, although it remains difficult to overcome the economic vulnerability caused by a high dependence on the mineral industry and foreign direct investment. The average economic growth rate of Mongolia is expected to hover around 6.0% throughout the next five years.
3. Fiscal deterioration has undermined the strength of repayment sources. The deterioration of the country’s economic situation has led to a decline in government revenue, and the fiscal deficit rate expanded to 17.0% in 2016. In the short term, despite fiscal consolidation measures such as raising social security contributions, increasing excise tax and cutting capital expenditures, it is expected that the fiscal deficit rate in Mongolia will be at 10.5% in 2017 and 8.2% in 2018. The ratio of financing needs to GDP will rise to 22.4% and 21.5% respectively. While international organizations, foreign governments and banks provide a large amount of external assistance to Mongolia and form a temporary fiscal buffer, the stability of the sources of debt repayment is undermined.
4. With Mongolia’s government debt increasing rapidly, government solvency weakens. Affected by the country’s fiscal deterioration, the general government’s gross debt-to-GDP ratio of 2017 and 2018 will increase rapidly to 94.9% and 101.5% respectively. In the short term, an increase in imports of capital goods related to mining will lead to a larger current account deficit. The country’s total external debt burden is heavy. It is expected that the ratio of total external debt to GDP will be 235.5% and 232.7% respectively in 2017 and 2018. There is a serious lack of foreign exchange reserves and pressure from Tugrik devaluation, causing the foreign-currency solvency of the Mongolian government to weaken substantially.
In the short term, despite a large amount of external assistance, a substantial increase in the fiscal deficit and currency devaluation of Mongolia will increase the government debt burden rapidly due to the country’s deteriorating economic situation. Coupled with its widening current account deficit, heavy external debt burden, and a serious lack of international reserves, the government solvency in local and foreign currency is facing greater downward pressure. Therefore, Dagong is assuming a negative outlook for the local and foreign currency sovereign credit ratings of Mongolia for the next 1-2 years.